June Jobs Are a Summer Rerun

The June jobs report gave off a “steady-as-she-goes” vibe, with hiring continuing while the unemployment rate ticked up slightly to still-low levels. That sounds overall fine to us, but much of the coverage dwelled on slowing net hiring and higher unemployment, warning it means the economy is weakening. But in our view, the latest jobs numbers simply confirm the US economy expanded in the year’s first half—a reminder of the solid economic backdrop underpinning the bull market.

June nonfarm payrolls rose by 206,000, beating expectations for 189,500, while the unemployment rate inched up to 4.1% from May’s 4.0%.^[i] The Labor Department also reported hourly earnings rose by 3.9% y/y, the smallest gain since 2021, and revised April and May nonfarm payroll growth downward by a combined 111,000.^[ii] A few called this a “Goldilocks” labor market—not too hot, not too cold—which doesn’t seem like a bad thing to us. But that wasn’t the common reaction we found, as the consensus seemed more dour. Some worried June’s higher unemployment rate signaled a prolonged climb was underway. Others fretted over industry-specific developments, e.g., is it troublesome the government is primarily responsible for most new jobs? Or that temporary help employment fell bigly (-48,900 in June), which some think portends to future trouble?

We agree there are some soft patches in the labor market. The government’s 70,000 added payrolls in June far exceeded its prior 12-month average of 49,000, and while a job is a job, government employment doesn’t indicate how the private sector—which comprises the lion’s share of US GDP—is faring.^[iii] Manufacturing payrolls slipped by -8,000, further confirming heavy industry’s longer-running struggles.

Yet some concerns are a tad overwrought, in our view. Take the big slide in temporary work, an alleged “canary in the coal mine” implying looming economic weakness. The logic: As companies grow, they hire temporary help until they can fill full-time positions. But when times get tough, those temp workers are the first let go. Sounds sensible, but even hiring experts have issues with this theory. For one, temp trends tend to reflect industry or sector-specific developments than the broader economy—e.g., retailers ramping up hiring for the winter holiday season. Two, the recent downturn in temp work looks less like a worrisome harbinger and more a return to normal. There was a big surge tied to pandemic-related fallout—for example, the number of daily travel nurses jumped from 50,000 to 160,000 in 2022.^[iv] But with the economy returning to normal, so, too, are hiring trends.

June’s higher unemployment rate is also partly due to a good reason: More people entering the labor force, with higher wages likely pulling some back in. The labor force participation rate ticked up from May’s 62.5% to June’s 62.6%, and the rate for workers aged 25 – 54 years old (known as “prime-age” workers) hit a 22-year high of 83.7%.^[v] Looks to us more like a case of rising labor supply than falling demand for workers.

Relatedly, that uptick in the unemployment rate means the “Sahm rule” is close to triggering. The rule, popularized by economist Claudia Sahm, states that when the three-month moving average of the unemployment rate is 0.5 percentage point (ppt) or more above its low over the prior 12 months, the economy is in recession. The unemployment rate has now averaged 4.0% from April – June, 0.4 ppt above its three-month average low of 3.6% over the past year.^[vi] Now, this isn’t going totally unnoticed, but Sahm-rule-based forecasts for a US recession have quieted considerably, perhaps indicating an improvement in sentiment as more people realize the US economy is faring better than expected.

Overall, the US labor market may be slowing, but is still chugging along—consistent with economic expansion. Take a step back, and June’s data are in line with the labor market’s longer-term trends: Rising payrolls and low unemployment. (Exhibits 1 – 2)

Exhibit 1: Nonfarm Payrolls Over the Past Three Years

Source: FactSet, as of 7/8/2024.

Exhibit 2: Unemployment Rate Over the Past Three Years

Source: FactSet, as of 7/8/2024.

Labor data are late-lagging indicators, so they don’t reveal much new news about the US economy. For forward-looking stocks, ongoing American economic expansion is old news—they likely pre-priced this growth a while ago. Yet growthy jobs data can help investors see feared outcomes (e.g., recession) from the not-too-distant past aren’t likely to come to pass—a contributor to some of the broader optimism we have seen among investors lately.